Islamabad’s economic collapse won’t be good for India

After the IMF review mission rejected Pakistan’s debt management plan and asked it to steeply increase electricity tariff  to restrict subsidies, PM Shehbaz Sharif indicated he had no choice but to implement the harsh conditions. Pakistan is in the midst of a deep forex crisis with reserves down to just $3.09 billion as of January 27. This can cover only 18 days of imports. Thus, Islamabad desperately needs to complete the pending ninth review under IMF’s $7 billion extended fund facility to stave off default.

But Pakistan’s power sector, long a quagmire of unsustainable subsidies, poor transmission and lack of accountability, is posing a problem. For the source of the woes, many point to the mismanaged privatisation exercise that led to the creation of 12 local distribution companies that mostly provided employment to military retirees. Meanwhile, a 2020 study flags the Pakistani government paying more than Pakistani Rs 1 trillion as Tariff Differential Subsidy where a uniform tariff is applied across all electrical distribution companies despite differences in cost, and the gap in revenue is financed by government. Add to this Islamabad’s policies like the Pakistani Rs 120 billion energy subsidy to exporters announced four months ago.

If Islamabad is unable to get itself out of this economic hole, it would of course have catastrophic consequences for Pakistani people. But India should be concerned too. A total collapse of the Pakistani government – which is also facing a new spate of homegrown terrorism – could see the entire stretch from the Iran-Afghanistan border to Lahore becoming an extremist hotbed. This would certainly complicate India’s security challenges and lead to an even greater Af-Pak problem than the one the world has faced. Major countries must be on guard against such a disaster.

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